Income approach (capitalisation and DCF)
A short, practical note on income approach (capitalisation and DCF), with the public definition from IVS / Red Book (effective 31 January 2025).
In my practice, the income approach values what a property earns. For a let building I either capitalise a stable rent at a market yield, or project the cash flows year by year and discount them (DCF). Every input — rent, voids, costs, yield, discount rate — must come from market evidence, and I show where it came from. IVS 103 gives it significant weight when the ability to produce income is the critical element of value, as with offices, shops or hotels.
“The income approach provides an indication of value by converting projected cash flows to a single current value.”
Source: IVS 103 Valuation Approaches, para 30.01
“An approach that provides an indication of value by converting future cash flows to a single current capital value.”
Source: Red Book Global Standards, Part 2 Glossary («Income approach»)
Common confusion
Yield ≠ return on your money: a valuation yield is read from the market, not chosen to hit a target.